Pros & Cons of Contract for Deed

A contract for deed is an agreement for purchasing real estate with no a mortgage lender: The purchaser agrees to pay monthly payments directly to the seller, who will turn over the deed to the home when the whole loan is paid back. It's a more straightforward, frequently cheaper alternative to buying with a mortgage, but it isn't secure.

Benefits to Buyers

If you can't qualify for a mortgage because of a previous bankruptcy or your job history, a contract for deed might be a fantastic choice, the U.S. Legal website states: When the seller is ready to conduct business, that's all you need to go ahead. You could have more liberty negotiating a down payment, and you won't even need to pay the closing costs, origination fees and other expenses involved in taking out a mortgage. Another benefit is that in case you default on your mortgage, a lender may demand you pay back the whole loan, even if you make up the payments. A seller using a contract of deed doesn't even possess that right, unless you consent to include that as a clause in the contract.

Risks to the Buyer

The biggest risk of purchasing by contract for deed is that you have no claim to the property until you't paid the whole purchase price, as stated by the University of Minnesota Extension office. That means that in case you default and can't make up the payments, you eliminate the property and all the money you've put in to it.

Benefits for Sellers

If you're the seller, a contract for deed offers you a means to conduct business with a purchaser that can't even qualify for a mortgage. The process is usually faster than a mortgage sale. If the purchaser goes into default, you can terminate the contract immediately, without requiring the time for all the legal processes required for a mortgage to foreclose on a home.

Benefits for Sellers

The biggest disadvantage of selling land this manner, U.S. Legal states, is that the property won't even be off your hands for many decades, which may not suit your investment plan. You'll also be waiting till the contract is completed to obtain all your money, rather than the immediate payment you'd get out of a mortgage deal.

Flexibility

The exact terms of a contract of deed are flexible, depending on what the two parties work out between them: The amount and time of payments are up to the seller and buyer. Depending on the exact terms, this flexibility might be a pro or a con.